Legislature(2019 - 2020)BELTZ 105 (TSBldg)
03/06/2020 01:30 PM Senate JUDICIARY
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| Audio | Topic |
|---|---|
| Start | |
| Confirmation Hearing(s): | |
| SB191 | |
| Confirmation Hearing(s): | |
| SB191 | |
| Confirmation Hearing(s) | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| += | SB 8 | TELECONFERENCED | |
| += | SB 191 | TELECONFERENCED | |
SB 191-TRUSTS, TRUSTEES, COMMUNITY PROPERTY
1:47:34 PM
CHAIR COGHILL announced consideration of SENATE BILL NO. 191,
"An Act relating to trusts and trustees, including trust
division, the powers of trustees, delayed gifts to trusts, and
community property trusts; and providing for an effective date."
CHAIR COGHILL noted that there were several amendments for the
committee to consider.
1:47:52 PM
At-ease.
1:51:57 PM
CHAIR COGHILL reconvened the meeting and solicited a motion to
adopt the committee substitute.
1:52:21 PM
SENATOR MICCICHE moved to adopt the committee substitute (CS)
for SB 191, work order 31-LS1370\M, as the working document.
CHAIR COGHILL objected for discussion purposes.
1:52:53 PM
AIMEE BUSHNELL, Staff, Senator John Coghill, Alaska State
Legislature, Juneau, Alaska, on behalf of the sponsor explained
that version M incorporated the two amendments adopted in the
previous committee hearing. She referred to the first change, on
page 6, line 22, to delete the language "or a right accrued."
1:53:34 PM
At-ease.
1:54:02 PM
CHAIR COGHILL reconvened the meeting.
1:54:08 PM
MS. BUSHNELL said the first change in version M incorporates
Amendment 1, [A.1], which was adopted at the last hearing. It
read:
Page 6, line 22:
Delete "or a right accrued"
She said the second change in version M, incorporates Amendment
2, [A.2], which was adopted at the last hearing. It read:
Page 6, line 26:
Delete "Sections 5 and 8"
Insert "Sections 5, 7, and 8"
She explained that this change is in Section 9. The effect is
that Section 7 will have an immediate effective date.
1:54:52 PM
CHAIR COGHILL removed his objection and Version M was adopted.
He stated he would set SB 191 aside to return to the
consideration of governor appointees.
SB 191-TRUSTS, TRUSTEES, COMMUNITY PROPERTY
1:59:12 PM
CHAIR COGHILL returned to the hearing on SB 191. [Version M was
before the committee].
2:00:09 PM
SENATOR REINBOLD expressed concern that SB 191 had just one
referal and was sponsored by the chair of that committee. She
noted that she just received the committee substitute and
proposed amendments at the beginning of this hearing. Since she
has numerous questions she recently spent an hour speaking to
the Legislative Legal Services bill drafter to better understand
the bill. However, communications between the agency and bill
sponsors are confidential so the legislative attorney suggested
that she speak to the sponsor to ask any questions. She asked
for the purpose of the bill.
CHAIR COGHILL confirmed that he was the sponsor of SB 191. He
said he agreed to work with the Alaska Trust & Estate
Professionals (ATEP) to improve Alaska's estate and trust laws.
He highlighted three issues that SB 191 addresses: it provides
improved statutory language for dividing trusts for
beneficiaries; it defines community property income; and it
creates a new section to allow the promise of a gift under the
Alaska Gift Trust Act. This provision, which is a new concept,
will allow people to take advantage of the current federal tax
exemptions for estates.
2:04:04 PM
JONATHAN BLATTMACHR, Attorney; Principal, ILS Management, LLC,
Long Island, New York, provided a brief explanation of how the
Alaska gift trust concept was developed. In 2012, the estate and
gift tax exemption was set at $5 million but was slated to drop
to $1 million on January 1, 2013. Many people wanted to use the
enhanced exemption to pass on their wealth to family members.
However, retaining the right to use property until death meant
it was still part of the estate for tax purposes. One of his
colleagues at Milbank, LLC, a New York law firm, developed the
"gift by a promise" concept. In all states, a gift is not
enforceable unless the person receives some consideration for
it. However, Pennsylvania common law suggested a person could
make a gift by a promise, which would be enforceable if it was
put in writing. Many of his colleagues suggested their clients
take advantage of the tax exemption by traveling to
Pennsylvania, using their lawyers to do so.
Congress kept the $5 million exemption and increased it to $10
million in 2017, or $11,580,000, adjusted for inflation. This
exemption will continue to be adjusted for inflation until 2026
when the exemption is expected to be cut in half.
MR. BLATTMACHR said many people would like to make gifts now.
The ATEP worked on language in Alaska to bring money into the
state and provide work for professionals in the state by
creating a qualified gift trust. These [settlors] from Alaska or
the Lower 48 would make a promise in writing, for example, for
$11.5 million, but still keep and use the assets. He offered his
view that Alaska will be a leader in estate planning, that this
provision will bring work to Alaska, and it will result in
significant deposits of funds to financial institutions in
Alaska. He said the ATEP does not think anyone will be harmed by
it.
2:08:03 PM
SENATOR REINBOLD referred to a notation on the fiscal note that
stated this applied to contracts, except for contracts relating
to interpretation of Janus v. AFSCME. She asked whether this
bill would have any impact on union trusts, health trusts, or
Native organizations.
MR. J. BLATTMACHR answered that he did not believe it would have
any impact whatsoever. The case she mentioned relates to another
provision of SB 191. He explained that a case pending before the
Alaska Supreme Court pertains to community property. There are
major tax implications when a couple makes their property
community property. When one spouse dies, his or her estate
receives forgiveness on capital gains as does the surviving
spouse's portion. There is an historic reason for community
property receiving that treatment, but other forms of commonly
owned property between spouses does not. In 1998, the state
adopted community property by an opt-in system. People have
saved hundreds of millions of dollars because of that provision,
by merely creating an Alaska Community Property Trust. An
Alaskan couple can do so by contract or by trust. At the time of
death of the first spouse, all of the inherent gain in the
property receives a step up in basis because it is community
property.
He said the case before the Alaska Supreme Court deals with the
circumstance in which the couple created community property but
one of the spouses indicated that it only applied to the value
at the time the trust or contract was created. Any income or
appreciation occurring after it was converted to community
property remained separate property. He offered his view that
the decision is wrong. The decision goes against the purpose of
Alaska's community property statutes, which is to have all the
inherent gain subject to the tax benefit.
MR. J. BLATTMACHR said the Alaska Supreme Court will make a
determination on that case, but everyone else who has created
community property will receive the tax benefit.
2:12:40 PM
SENATOR REINBOLD asked if it would impact people with less than
$5 million.
MR. J. BLATTMACHR stated that grantor trusts are structured such
that they are ignored for income tax purposes. A person can do
this alone or with his or her spouse. The person who creates the
trust must pay the income tax on it, which means the trust
receives its gains entirely free of taxes. The IRS allows
[grantors] to sell assets to the trust without any gain or loss.
When one spouse dies, the trust loses its grantor status, but
the survivor may want to continue as a grantor trust. This bill
will allow the trust to be divided when the first spouse dies
and continue the grantor trust status.
He advised that it could affect estates of less than $5 million.
For example, if a couple has $4 million in community property
assets and the husband dies, the entire inherent gain on the
estate will be forgiven by a special IRS rule. If the couple
owned the property jointly or separately, only the half owned by
the husband would receive that step up in basis. SB 191 will
allow a spouse to use the $11 million exemption by establishing
the promise of a gift in a trust. Even if the estate is only
worth $1 million at the time of the spouse's death, the
exemption will apply, and the family will have had use of the
$11 million asset.
2:17:24 PM
SENATOR REINBOLD noted the high rates of domestic violence and
financial abuse in Alaska and asked whether the bill would
create any unintended consequences or financial abuse.
MR. J. BLATTMACHR answered no; if a wife has $10 million in
assets, she could bequeath it to anyone without notifying her
husband. He did not see this bill aggravating the situation for
the spouse. He reiterated that the purpose of the bill is to
allow people to use their estate tax exemption today before it
is diminished. He said one benefit of the bill is that it allows
people to make gifts for more than they currently own, which
helps them protect their families from estate taxes.
He related that the Alaska Trust Act passed in 1997 and the same
type of estate law has been adopted in 19 states. He offered his
view that Alaska has the best estate laws, which has brought
significant business to the state. These funds are deposited in
banks in Alaska and these funds are loaned for people to
purchase homes or other things.
2:21:54 PM
SENATOR REINBOLD said she has had two bad experiences with
trusts, so she is not a big fan of them. She asked if his nephew
was Matthew Blattmachr.
J. BLATTMACHR answered yes.
2:22:51 PM
SENATOR REINBOLD acknowledged that the bill has some good
aspects for Alaska in terms of investment but reiterated her
concern that it may allow abuse of community property. She asked
whether it changed the definition of community property. She
related her understanding that anything earned during the
marriages is automatically community property.
MR. J. BLATTMACHR explained that property a married Alaskan
acquires is not community property. For example, if her husband
earned $5 million it would be his money, although a judge might
award some money in a divorce, and she would be entitled to a
minimum share of his estate when he dies. If a couple choses to
have community property, each spouse owns half. He compared
Alaska's system to Germany's system, such that spouses start
with a separate regime, but they can elect into community
property. He highlighted the safeguards in the Alaska Community
Property Trust, such that the contract must be in writing and it
must warn in large, bold type that this could have significant
financial and legal ramifications. He said SB 191 is safe,
provides good measures for Alaskans, and in some instances can
be used by people outside the state.
2:27:08 PM
SENATOR REINBOLD expressed alarm that a mother could stay home
and raise the couple's children, but have no right to the money
her husband earns.
MR. J. BLATTMACHR said in Alaska and all but nine states, the
spouse who stays home owns none of the property that the other
spouse accumulates. The stay-at-home spouse has no say over any
of property the other spouse owns including how it is spent or
invested. He suggested that Alaska might consider adopting the
Uniform Marital Property Act that provides an automatic 50/50
distribution of property. He recalled that Wisconsin did that in
the 1980s.
2:30:00 PM
SENATOR KIEHL asked for an explanation of how community property
might be treated differently in a divorce settlement.
MR. J. BLATTMACHR related his understanding that a judge in
Alaska has the power to determine the division of assets that
were acquired during the marriage. The judge can consider
anything that is proper to make the determination, which is
usually a 50:50 division in a long-term marriage. He related
several scenarios to illustrate how some states handle community
property. Under Alaska law, there is no claw back if the husband
gives $1 million to his girlfriend, he said.
2:33:20 PM
JAMIE DELMAN, Attorney, Shaftel Delman LLC; Member, Alaska Trust
& Estate Professionals, Anchorage, Alaska, cautioned that he was
not a divorce lawyer, but the judge would look at all facts and
circumstances if there was no community property. He offered his
view that if a gift was made shortly before a divorce, it could
be considered during the equitable distribution of assets.
2:34:05 PM
SENATOR REINBOLD expressed concern and frustration that a wife
who stayed home to raise the children while the husband worked
would not be entitled to an equal part of assets. She described
it as an insane system.
CHAIR COGHILL pointed out that Mr. J. Blattmachr said community
property would be the saner system and that Alaska has an opt-in
system.
2:34:47 PM
MR. J. BLATTMACHR confirmed that he said that community property
that is automatic is the sanest type of marital property regime
a state can offer its residents. He noted that Alaska allows
that by contract.
SENATOR REINBOLD related her understanding that in Alaska
parties must opt in.
J. BLATTMACHR answered yes. He said parties in subsequent
marriages often will have a prenuptial agreement, but those in
first marriages may decide community property offers tax
benefits.
2:36:57 PM
CHAIR COGHILL stated that the committee would not take up SB 8.
SENATOR REINBOLD suggested the committee discuss opt in.
CHAIR COGHILL said common options for community property are
joint checking accounts and joint registration of vehicles, but
looking into the requirements of becoming a community property
state would be separate from this bill.
2:38:43 PM
SENATOR REINBOLD advised that she was considering an amendment
pertaining to automatic community property.
CHAIR COGHILL said changes to community property might not fit
within the subject matter of SB 191. He suggested that she ask
Legislative Legal Services to weigh in.
2:39:30 PM
SENATOR REINBOLD asked if the 1998 community property opt in law
had anything to do with the estate taxes or trusts.
2:39:52 PM
MR. J. BLATTMACHR said he was the principal drafter of the
Alaska Community Property Act in 1998. He recalled meeting with
every legislator and that the bill passed the legislature
unanimously. He said he was not aware of any abuse related to
that law. He said outside of the hearing he would be happy to
discuss whether Alaska ought to have an automatic community
property system.
2:40:57 PM
CHAIR COGHILL remarked that he had been patient during this
discussion, but there were several amendments to consider.
SENATOR REINBOLD said she had lots of technical questions,
particularly on Sections 3 and 4, but she was willing to
consider the amendments.
2:42:37 PM
CHAIR COGHILL suggested her questions might be answered offnet.
2:43:29 PM
SENATOR REINBOLD reiterated her earlier concerns about the bill.
CHAIR COGHILL suggested that the committee consider amendments,
set aside the bill to a future hearing, and allow members the
opportunity to research the issues related to estates and
trusts.
SENATOR REINBOLD reiterated her earlier concerns about the bill.
CHAIR COGHILL said the material is complex, and he would like
members to have their questions answered.
2:45:44 PM
SENATOR KIEHL moved to adopt Amendment 5, A.7, which read:
31-LS1370\A.7
Bannister
3/6/20
A M E N D M E N T 5
OFFERED IN THE SENATE BY SENATOR KIEHL
TO: SB 191
Page 6, following line 5:
Insert a new subsection to read:
"(d) A person who sells to a third party a
promise treated as a note that becomes a negotiable
instrument under (c) of this section shall provide
written notice to the buyer that the note was derived
from a promise made under this section and that
consideration was not provided. In addition, the
notice must state whether the note is backed by
collateral and whether the note is guaranteed by the
trustee or another person."
CHAIR COGHILL objected for discussion purposes.
2:46:02 PM
SENATOR KIEHL explained that Amendment 5 is similar to one
offered and withdrawn at an earlier hearing. Senator Micciche
indicated it was possible that one of the notes could be
guaranteed by the trustee. He worked with Mr. Blattmachr to
develop this language. Amendment 5 would allow the buyer to have
disclosure.
2:46:49 PM
SENATOR MICCICHE said Amendment 5 does not adversely affect the
bill, but it is unnecessary.
2:47:10 PM
SENATOR REINBOLD remarked that she liked the original amendment,
but she would support Amendment 5.
2:47:35 PM
CHAIR COGHILL withdrew his objection. There being no further
objection, Amendment 5 was adopted.
2:47:59 PM
CHAIR COGHILL moved to adopt Amendment 6, M.1, which read:
31-LS1370\M.1
Bannister
3/6/20
A M E N D M E N T 6
OFFERED IN THE SENATE BY SENATOR COGHILL
TO: CSSB 191(JUD), Draft Version "M"
Page 6, following line 5:
Insert a new subsection to read:
"(d) If a married person makes a promise under
(a) of this section, property owned as community
property or as tenants by the entirety by the married
person and the spouse of the married person during the
life of the married person may not be used to pay the
obligation represented by the promise unless the
spouse has provided the spouse's express written
consent to the payment."
SENATOR MICCICHE objected for discussion purposes.
2:48:25 PM
MS. BUSHNELL explained that the purpose of Amendment 6 is to
achieve good practice without being too restrictive. The goal is
for couples who both have a right to the property to make a gift
together. If only one spouse makes the gift, it would not affect
community property. She related her understanding that this is
current statute, that a person cannot give what is not his or
hers. This language makes it expressly clear in Section 4.
2:49:58 PM
SENATOR REINBOLD expressed concern that she just received
Amendment 6. She asked for assurance that in instances in which
the husband earns the income and the wife stays at home, that he
cannot gift his retirement to someone else such as the
university.
MS. BUSHNELL answered that a pension is personal property, which
in Alaska is an equitable division. However, she understood that
the division is almost never 50:50, since it depends on the
lifestyle, the children, the parties work history, and spousal
decisions regarding future education, which are decisions that
should be made by the parties.
2:51:16 PM
CHAIR COGHILL related his understanding that income, except for
retirement, can be shared.
2:51:34 PM
MR. DELMAN advised that federal law supersedes state law with
respect to retirement. To change the beneficiary, the spouse
would have to sign off on it. As a general rule, upon divorce,
an asset in a marriage without community property would be
subject to equitable disposition. However, prior to divorce, the
other spouse would not have any control over an individual asset
of one spouse.
2:52:50 PM
SENATOR REINBOLD said she likes Amendment 6, but she would like
the document to be notarized to protect spouses. She asked if
this bill needs stronger language than "express written
consent."
MR. DELMAN explained that written consent is used in Alaska
statutes in many places. He said he was neutral about requiring
the document to be notarized but acknowledged that a notarized
document would verify that the spouse signed the document. He
suggested that adding "acknowledged written consent" could be
added, but he did not believe the language "notarized" is
typically used in statute. He referred to AS 13.12.213, which is
in the context of waiving marital rights at death. He said those
rights can be waived by a written waiver signed by the spouse
and it does not require a notary.
2:56:22 PM
CHAIR COGHILL said Section 4, requires both spouses to sign the
promise to transfer a gift. The document must be signed in
writing and delivered to the trustee.
MR. DELMAN said he thinks that is right. If a spouse makes a
promise using marital assets, they would want the
contemporaneous consent of his or her spouse.
2:57:24 PM
SENATOR REINBOLD said she would like to help protect vulnerable
spouses. She asked whether this Amendment would help close any
loopholes.
MR. DELMAN answered yes. If a spouse would like to promise
marital property, the other spouse has to consent in writing.
2:58:43 PM
SENATOR KIEHL offered his support for Amendment 6.
SENATOR REINBOLD asked for the difference between express
written consent and the spouse's acknowledged express written
consent. She wondered if it should still require a notary. She
said she understood the ultimate goal of SB 191 is to take
advantage of tax savings.
2:59:47 PM
CHAIR COGHILL stated that he would fold the two amendments into
a new committee substitute for the committee to review.
3:00:24 PM
SENATOR MICCICHE withdrew his objection to Amendment 6.
There being no further objection, Amendment 6 was adopted.
3:00:31 PM
CHAIR COGHILL stated that SB 191 would be held in committee and
public testimony would remain open.
| Document Name | Date/Time | Subjects |
|---|---|---|
| CS SB8 Version S.pdf |
SJUD 3/6/2020 1:30:00 PM |
SB 8 |
| CS SB191 Version M.pdf |
SJUD 3/6/2020 1:30:00 PM |
SB 191 |
| SB 191 Amendment M.1 3.6.2020.pdf |
SJUD 3/6/2020 1:30:00 PM |
SB 191 |
| SB 191 Amendment A.7 3.6.2020.pdf |
SJUD 3/6/2020 1:30:00 PM |
SB 191 |